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It is that time of the year when VCs are asked about what sectors are they betting on in 2017? It’s become a game of “hot or not” for the last few years. Sectors seem to change as frequent as the years if not seasons. Food tech was hot a couple of years ago, no one seems to mention it anymore. AI and chat bots are probably still hot.

Investing cycle in venture is typically 10 years. The first 2-3 years is when the investments are made, over the next 5-6 years they are nurtured and then it’s time for exit and returning the money to the limited partners. To make stellar returns the portfolio companies and the sector they address need to be attractive even at the time of exit. The VC not only has the job to catch the wave during the investment, but also must be foresighted to see if a sector will continue to be hot over the next 8 years. That is the difference between a fad and a trend. A short-term capital can ride a fad and make money, but patient capital like venture needs to catch a trend. The difference between fad and trend – Vietnamese food in India may be a fad, but healthy eating is a trend.

Founders have an even tougher choice to make. The path to fad is easy – it is the talk of the town and can attract talent and capital. The path to follow a trend is relatively tougher and needs a greater understanding between the partners building the company – founders and investors. The investors must understand the upside of a trend and continue supporting the team. The founders must believe in frugality to sustain the company for the years until the start of significant cash flows from the business.

For investors, the choice can mean better returns. A fad usually has irrational investor interest and valuation. A trend could be more attractive investment, but would require greater analysis and connecting the dots.

So, shouldn’t the question for the investors be – what is your prediction for major trends in 2025?

We in India are experiencing a shift in the way we are paying our bills, buying insurance, investing our savings and borrowing. Tech led companies are offering us better alternatives at lower cost and more convenience.

What are the macro trends that are driving these changes?

Millennials are thinking differently about financial services

A recent survey by CBInsights found that 79% of millennials in the US view their relationship with their banks as transactional and 59% think the financial products are not even targeted at them. Around 2/5 of India’s population is in the working age group of 20-35 years and like their counterparts in the US, do not relate to the traditional financial institutions and their products. These mobile first customers want convenience and personalization.

Incumbents underserving the consumers

Like in most other sectors, the Indian consumers are underserved by the existing financial service providers. Only 14% of individuals save at a financial institution, not a surprise considering that gold is still the preferred asset of investment. Even worse, only 6% of borrowed from a financial institution. We continue to be a cash economy with only 1 in 5 having a debit card.

Government pushing for financial inclusion and digital economy

The government is pushing for financial inclusion with programs like Jan Dhan Yojana, UID / Aadhar and Unified Payments Interface (UPI). A recent paper claims that with Aadhar decision making on loans would be done in 15 seconds and virtual credit cards will be issued instantaneously. Over 200M bank accounts were opened under the Jan Dhan Yojana bringing a large section of the population under the banking and digital umbrella.

Tech players are innovating

The tech players are re-imagining the role of tech from being an enabler to a disrupter in delivering financial products. With credit scores being new in India, tech enables the use of social and transactional data to evaluate credit risk for millions of new to credit customers. It has lowered the friction of making online payments through wallets and seamless payment gateways.

Where are the opportunities?

Creating new markets

As the economy becomes less reliant on cash and moves towards a digital economy, there is a lot of transactional data which can be used for assessing credit worthiness of a consumer or a business. Companies like CapitalFloat and LendingKart use digitized credit risk processes to disburse business loans in record time. New to credit customers like people in their first job, who would have never got a traditional bank to loan them for a durable purchase, have access to personal finance from companies’ tech lenders like Finomena and Krazybee.

Virtual EMI cards, which are now a payment option on popular ecommerce sites, are pre-approved personal loans for buying from ecommerce sites. NBFCs like Bajaj finance and new age tech players like FastBanking are among the growing number of virtual EMI card providers enabling a large population to get financing for their online purchases.

Disintermediating the traditional bank

Banks have traditionally been the one stop shop for all our financial needs, but they have been very inefficient and discriminatory. Small savers never got the personal finance advice that the HNIs got. But this is changing with personal finance platforms like MoneyView and Slonkit that provide tools to everyone to set savings target and effectively manage the use of credit cards. Personal asset management companies like Scripbox and FundsIndia have democratized the portfolio management services that were earlier exclusive to HNIs. They have simple intuitive mobile apps that makes it easy for a new to investing consumer to save and track investments.

There is a huge disparity between what the savers get for their deposits and what the borrowers pay for their loans in India. This is bound to change as P2P platforms like Faircent take off. It has already taken off in western markets like the UK where over 50K people have cumulatively lent GBP 1.4B to businesses on FundingCircle.

Online brokering

Not long ago, getting a quote for insurance, loans and credit cards involved a visit to a few neighborhood bank branches. Consumers were still not guaranteed the best deal. Platforms like policybazaar, bankbazaar and deal4loans have made it possible to get a comparison and buy insurance and loans almost instantaneously.

Lowering the friction in a transaction

Payment gateways have made the process of completing an online transaction seamless. The governments push for ‘Digital India’ is proving to be a huge boon for the gateways. Wallets, with preloaded money that can be spent at participating online and offline merchants have become ubiquitous. It is not only the backbone for most ecommerce transactions today, but also provides solutions like remittances and transfers.

Conclusion

Tech companies seem to be best placed to offer financial services to the large young underserved population that is mobile first and on the internet. It is happening already with apple, google and amazon making big bets on fintech. The next set of large financial companies will be tech startups that serve this large innate demand of the new consumers.

Founders usually are looking for advice and thoughts for pitching to VCs. Typically VCs look at hundreds of deals every month. Not every VC is looking at the same data or has similar preferences, making it even more complex to know what to cover in a pitch. While I’ve pitched only a few times, it occurred to me that I spend a lot of time listening and discussing pitches, so I should just put a piece about what VCs would like to hear!

You have around 5 minutes to grab the attention of VCs; so do not wait to tell about the most awesome part of your startup – team, market entry, technology etc. Tell it like a story. We need to know what problem you are solving and why you care about it. Tell us about your market. How big it is, how much can you address, how soon and who are the competitors? How will you have sustained differentiation against your competition? Who are your partners in crime, your team. Of all the things they could do in their lives, why this crazy thing? If you have launched, show us what you have done. Nothing like seeing product demo and hear customer testimonials. Have a clear ask, having clarity about what you want from an investor (how much are you raising, at what terms, introductions) tells a lot about your planning skills. One last key takeaway is to know your audience before pitching to them.

First, apologies for not posting last month, I started interning with super awesome VC firm and was busy settling in Mumbai. I will try to make an effort to keep up to my target of at least one post every month. This blog is my first one about macroeconomic views about flow of capital and investments in global markets.

India has seen a deluge of foreign capital inflows in this year, more so after the clear electoral mandate in May 2014. While improved domestic condition is the major reason, changed dynamics in the global geo-political and economic conditions have also resulted in the increased deluge of capital.
A look around the globe and we see unrest in other emerging economies and regions, Turkey, Thailand and Middle East. This is making these regions a no-go for fresh investments. The money pushed out of these regions must go somewhere else and India with a stable geo-political environment for investment, pro-entrepreneurship government and buzzing entrepreneurial environment is providing the confidence to investors.

Russia could become uninvestible by sanctions. Russian investors want to play it safe during sanctions. This has led Russian banks to move their investments to friendly countries like India and lending to Indian entrepreneurs like the debt of $1.5bn to the Ruias of Essar and the venture investments made by the mail.ru group in Indian startups.

Brazil’s economy contracted in the last quarter and China’s clocked growth in lower single digits. Economic recovery in Europe has been slow nudging the ECB to a rate cut, which has led to lower borrowing costs in the EU. The long term impact of this would stimulate the European domestic economy, but it would also flush the system with more and cheaper funds. At least some parts of these funds will invigorate euro-funded carry trades, where investors will borrow at low rates to buy high yielding assets in emerging countries like India. Expect the party in the Indian the public equity, debts and private equity/venture markets to continue for some more time.

Here’s a list of 5 exciting b2b startups that I’m following. I used the evaluation criteria used by Jason Ball in his blog. – People, Product, Potential and Traction.

1. Unicommerce

Cloud based Multi-Channel Order Fulfillment Platform which enables E-commerce merchants

People: Started in 2012 by a group of IIT / IIM graduates, they have proved that passion, talent and ability are more important than experience. Without any previous experience in warehouse/inventory management , they have build world class inventory management software and have over 4000 paid users! Ankit, Manish and Vibhu have relied upon their IIT connects for the first few deals and there after relied on the products strength and customer service.

Product: Their product, Unicommerce, is comprehensive enough for big e-commerce players to rely on and easy enough for smaller online merchants to use. It provides end to end order fulfillment including procurement, vendors, inventory, warehouses, drop shipments and returns. Being hosted on Internet, it enables small and medium sized online sellers to tap power of technology without any technology knowledge.

Potential: One of the ways that small offline businesses can survive the onslaught of e-commerce is by joining the e-commerce marketplace. The millions of small offline retailers and suppliers willing to join the online marketplace in India are the potential market for inventory management software.

Traction: Within a short span of 2 years, they could help their 4000+ customers do Rs. 1000+ Cr business. Unicommerce comes pre-integrated with all the leading marketplaces like Jabong, Snapdeal and Lazada, carts, couriers/shipping companies, accounting software and have built high barriers with these alliances for new entrants and in 2013, they raised their first round from Nexus.

2. Power2sme

Group buying site for SMEs

People: The founder, R Narayanan is a seasoned entrepreneur with experience in diverse industries, he is also a cost accountant working on profitability from early stages. He has built a team of around 60 and is advised by a very capable board.

Product: The company is a group buying site for SMEs in India. It has also diversified into SaaS applets and employee retention and motivation for SME. The primary business of group buying can include several products (over a million products listed in amazonsupply.com) and serviced through the common infrastructure.

Potential: The Indian economy is poised to return to high growth and the new government will provide an impetus to manufacturing, the market for industrial supplies will only increase. It is a blue ocean out there and the market is in billions, even amazon has started catering to SMEs in the US through amazonsupply.com.

Traction: With $8m of funding from Inventus, Accel and Kalaari, there is enough capital to see the company through the venture phase. The company has its head quarters in Mumbai, which is the hub of commodity business in India. Continue reading →

Did shareholders of Myntra get the maximum value from the acquisition? Most acquisitions we hear in media have competing bidders and Myntra could have looked for other buyers and not just Flipkart. As news of the deal has been around for months before the deal was finalized, both had invested/sunk time, money and reputation into the deal and were in high pressure to close the deal. Myntra could have been bought over by one of the large conglomerates that are also in offline fashion retail or international investors, these have deep pockets for investments and innovation. With competing bidders, the price discovery would have been more fair and in this case Myntra shareholders may have benefited.

Disclosure: Both Myntra and Flipkart are private companies sharing very little financial information, so these comments are based only on publicly available information.

Why are banks pruning their branches after years of growing them? What is the purpose of a bank? To grow savings, get a loan, make and receive payments.

With crowd funding sites like zopa, lending club, ilend and umpteen other crowd funding sites, individuals can cut the middleman and take direct control of their investments or get a loan. Venture capital, PE and debt funds are better capable of evaluating the risks of investing and lending to businesses. NBFCs (Non Banking Financial Institutions) in India – an umbrella that includes micro financial institutions (MFIs), Asset backed financiers (housing, auto and consumer) have better infrastructure like geographical coverage, understanding the market, credit score of borrower, than banks to cater to customers. Focused lenders that lend to infrastructure, agriculture and export sectors are better placed in their sectors than banks. Crypto currencies can’t be written off and will comeback as they offer an almost no transaction charge transfer of money. New payment solutions like mpesa by Vodafone and Square (and the look alikes) serve merchants better than solutions provided by banks. So why do we need a conventional bank in its current form?

Indian VC/PEs are excited that with the new government with clear mandate set to take office, the IPO markets in India will be better in the next 6-8 months. Is it the best exit for VC/PEs? IPOs usually involve selling a minority stake to the public and fail to extract and synergy control premium that majority stake sales can elicit. Public issue of equity involves high transaction costs and carries the risks of market conditions for success. The other common exit option is secondary sale, but PE firms at the buy side are shrewd negotiators and can walk out of a deal if they do not like, this limits the premium for the seller. Management Buy In is another possibility, but will usually involve a PE, limiting the upside potential.

Trade sales seem to be better – strategic players who have interests in the sector and company pay a higher premium for control and synergy and deals involve very little payout to the bankers and legal team, bettering the returns for the investors.

The usual checklist of due-diligence before recommendation for deals/investments involves a series of checks in accounting, actual check of inventory/bank balance and letters from vendors etc. However, the potential target must also be evaluated on certain qualitative parameters like the business model and environment, macroeconomic and social consideration and fit in the portfolio for the acquirer.

Below is a list of a few important considerations

Business model and environment

Is there any venture like businesses that has promising high growth?

Any Intellectual Property that can be leveraged for new streams of revenue?

Will the current management team continue?

Is there major re-structuring of business required?

What is the prospect of the business – Is this a declining industry?

When is the next level of large capital investments required for the current growth figure?

Many startups in India do not have an idea of how the capital structure of their company will affect them and their company. Adding debt can be a smart way to retain a higher ownership of the company and meet government regulations in certain sectors (Flipkart and Myntra received ED notice for allegedly exceeding the foreign equity stake holding beyond what is permitted). Companies must use debt to finance capital equipment/expenses and expensive venture equity for product development and as a bridge between operational income and expenses. Raising debt is more challenging and may require collateral and personal guarantees, but is worth the extra effort.

The people structure at VC firms is very different from conventional companies and professional firms. There are more people at the top than at entry and mid levels. At the top are general partners or GPs, they have raised the money and have the check book, these are people who have in their past lives been successful entrepreneurs or professionals with several years of experience at top consulting/investment banking firms. The middle level is principals/VPs who have a top notch MBA either from top IIMs or Harvard/ Stanford and a few years of experience, these guys head teams of entry level analysts, legal and core finance professionals to assist the partner by recommending investment opportunities and serve as an extra pair of eyes on the portfolio companies.

“How do you spot a VC in a party?” “He looks for the exit, when he enters the party hall” It’s a popular joke I heard at the PE/VC conference at Oxford.

Most common exit options for VCs are secondary sale, acquisitions and IPOs. Secondary sales are not popular for LPs who might have invested in both the sell and buy side VCs and end up losing on the transaction charges. Only a few Indian firms are product driven, most are growth/market stories and do not look attractive targets at their valuations. Unlike their US counterparts, Indian companies are conservative and do not acquire companies to hire top talent. The last exit option is through the IPO route, this is the most expensive exit option due to the high transaction costs.

I believe every individual and business must focus a percentage of their resources on moonshots. Moonshots are experiments that strive to achieve what almost seems foolish to pursue, but if they succeed, it will not only make the experimenter a rockstar, but also further mankind’s quest for knowledge. Google uses a part of its resources for such projects, the driverless car and the Google glass can change the way we live in this world.

These investments are risky and enough knowledge and research needs to be done before jumping into your next product development, business expansion or alternative investments in real estate, art, angel investing and derivatives, but it is worth the effort for you and the society.

Most online businesses are very clear why they exist – to solve a problem for their customers. If they have raised funds (internally or through an angel/VC) they have convinced their stakeholders of their business model, passion of the initial team/founders and potential of their business/idea. However, the basics of business to thrive remain the same whether online or offline. Below, I’ve attempted to highlight the top 3 measure that must also be considered before deciding to start up or invest in a business.

Cash flows

My first lesson on joining business was that cash flows decide if you will exist in the next financial period. Cash flow from the core business is a vital sign of the health of the business, but if the business requires high capital expenditure every year then it must be weighed against the cash flows from the core business. Despite having low profitability companies like Amazon.com or Tesco UK have large net positive cash flows due to positive working capital and command large valuations.

Recruiting

One of the biggest challenges for companies is to find the right talent to execute plans of growth. Very little importance is given to human capital Continue reading →